At a time when markets around the world are struggling to find a competitive advantage, North America has one that has been in place for over 15 years. The trade agreement between the U.S., Canada and Mexico has opened markets and established a record of growth and success that could prove key to a strong recovery. But no agreement is perfect and there are issues with NAFTA that businesses argue must be addressed if it is to live up to its promise.

The economic crisis in the U.S. has had a definite impact on its NAFTA trading partners-Canada is the U.S.’s largest trading partner, Mexico its third largest. Trade with both countries is down, and there are concerns that an inward focus on the part of U.S. trade policy makers could lead to measures that weaken NAFTA. The U.S. stimulus measures, particularly the “Buy American” provisions included in the American Recovery and Reinvestment Act (ARRA) resulted in loud cries from not only Canada and Mexico, but from within the U.S. itself. Businesses affected by the requirements fear that the open trade that developed over the years since NAFTA’s inception will be undermined by provisions that fail to understand the depth of the trading relationship.

The Recovery Act was amended so that the “Buy American” legislation remained consistent with U.S. trade obligations such as NAFTA, but confusion still exists and spending in municipalities and regions not subject to NAFTA legislation is still restricted. NAFTA has encouraged the development of trade across a seamless border, with many American companies sourcing parts from Canada and Mexico, and with components crossing the border several times before completion of the final product. Of the $1.5 billion in two-way daily border trade between Canada and the U.S., a third of that is comprised of intra-company transfers of parts and materials.

The “Buy American” legislation, which allows for stimulus money to be spent only on American-made goods, will make it impossible for not only foreign companies, but for some U.S. companies who use foreign components to benefit from stimulus-inspired municipal and infrastructure projects. It has also hurt U.S. businesses as Canadian municipalities have retaliated with their own protectionist legislation. This has been the case in the area of municipal water and wastewater projects, which has $7 billion in dedicated Recovery Act funds.

Wisconsin-based Aquarius Technologies Inc. provides components and technologies for wastewater treatment in industry and municipalities. The company uses a component in their treatment plants that is produced in Canada. Under the current requirements, Aquarius is not able to use the product. “There are things we can do to get around that, but it adds to our costs and doesn’t create jobs or additional hours,” said Tom Pokorsky, president and CEO of Aquarius. But Pokorsky says his real concern is Canadian retaliation, “I do about 25 percent of my business in Canada and that will be cut off if the Canadians retaliate and boycott our products.” Over the last 25 years, Pokorsky says that the wastewater market has become pretty uniform throughout Canada and the U.S., with products and services traded across the border. The industry will take a real hit if a compromise isn’t reached. “It’s protectionism and it goes against all the basic rules for recovery in a global recession,” said Pokorsky.

Figuring out these trilateral trade headaches is becoming even more important as business, hit by escalating transportation costs, increased security, and safety risks, and a rising Chinese currency are looking to source products and components closer to home.

“Near shoring is becoming more attractive for a number of reasons. Real labor rates between Mexico and China are shrinking. China’s yuan has gained against the U.S. dollar, while the Mexican peso has fallen,” said Armando Beltran, director general for Schneider National’s Mexico operations. With Chinese labor costs comparatively rising, transportation costs from China begin to factor more heavily into the supply chain equation. Additionally, companies are looking for shorter lead times and production in Mexico places them much closer to the U.S. and Canadian markets.

Low cost country sourcing also carries an inherent degree of risk. Closer proximity to suppliers gives businesses tighter control over factors such as product quality, intellectual property protection and supplier performance and quality. A recent study by AMR Research, a leading research firm focused on global supply chain and technologies, found that the risk of sourcing and manufacturing in low cost countries, including China, has many companies planning to source closer to home. AMR’s quarterly report showed that 84 percent of the research respondents are looking to Mexico as the first choice for near-sourcing; the second choice, identified by 55 percent of respondents, was Canada.

“We are seeing that the more the product requires value-add, such as engineering or design work, the more they are locating to Mexico,” said Beltran. Recent developments support this perspective; this summer Motorola opened an engineering design center at Technologico de Monterrey’s Research and Technological Innovation Center, its first ever in Mexico. The facility is approximately 83,000 square feet and represents an investment of almost $8 million. Beltran also said that companies like LG Electronics and Samsung are also building and expanding their facilities in Mexico.

“Buy American” and near-sourcing aside, the border is still not as seamless as one would hope. Getting goods back and forth across the northern and southern borders still remains a knowledge intensive and challenging task. Businesses in all three countries believe that there is a need to harmonize customs and security.

“It is possible to develop policies that meet the needs of government without inhibiting trade,” said Mary Anderson, president of I.E. Canada (the Canadian Association of Importers and Exporters). But businesses are finding that customs and security agencies still have a long way to go to achieve this aim. In fact, the requirements and regulations have become increasingly complex. Prior to 2001, U.S. Customs and Border Protection’s ACE (Automated Commercial Environment) program, which was designed to facilitate trade and enhance border security, required shippers to provide 15 data elements; today the program requires 106 data points, and some must be provided prior to the goods being loaded at a foreign port.

The cost of complying with multiple program requirements and becoming recognized through trusted shipper programs, such as U.S. Customs’ C-TPAT (Customs-Trade Partnership Against Terrorism) or Canada’s PIP (Partners in Protection), is also increasing. A report released this summer by the Canadian Chamber of Commerce, entitled “Finding the Balance: Shared Border of the Future,” stated that one company “reported an annual expense of $1 million because of the inspections and delays from increased security measures and paying to be a member in multiple trusted shipper programs.” While Canadian and U.S. government programs have similar aims, small differences have created a situation in which businesses must be certified in both countries’ programs. Overburdened traders are urging both CBP and CBSA to reach mutual recognition agreements, rather than differentiating their security and customs processes.

The Canadian report goes on to detail the thickening of the Canada-U.S. border, identifying the proliferation of regulations from different government departments, new and increasing fees and inspections, as well as weaknesses in the infrastructure. Such costs quickly erode the benefits of a preferential trade partnership.

On the Mexican side, the coordination of customs processes at the Mexico – U.S. border is still a huge stumbling block to seamless trade. On average, said Beltran, it takes three days for a truck to cross from Laredo to Nuevo Laredo; that’s a distance of only three miles. It’s an extremely complicated and time-consuming process. “At the border, you have so many people and agencies involved in the process. A load from the U.S. to Mexico is touched by seven entities before it clears the border,” explained Beltran. That not only makes the move complex, but leaves a lot of room for theft and tampering.

While programs like C-TPAT, along with other electronic clearance measures could help ease the flow, the technology capabilities of the multiple partners vary widely. Some are barely automated at all. “Mexico is notable for the tremendous amount of paperwork required-the customs process in Mexico is far more complex than in the U.S.,” said Beltran.

While the U.S. is concerned about safety and security at both borders, Canadians raised a cry when Department of Homeland Security (DHS) Secretary Janet Napolitano suggested there was a need for parity at the northern and southern borders. The Canadians think this is overkill, saying that the higher incidences of drug smuggling and illegal entry at the southern border are not reflective of activities on the northern border. The fear is that increasing security measures aimed at dealing with the problems in Mexico will harm Canadian traders, who have already met the current security guidelines and are simply trying to conduct business.

Crossing from Mexico into the U.S. has some additional challenges. Currently, Mexican carriers are not allowed to transit into the U.S., while American and Canadian trucks are allowed to operate in Mexico. This issue was a contentious topic at the August “Three Amigos” summit, where Mexican president Calderon encouraged U.S. president Obama to resolve the dispute, allowing Mexican trucks to transit loads into the Unites States. According to NAFTA, Mexican trucks were to be allowed to operate in the U.S. as of the year 2000, but safety and security concerns on the part of the U.S. has prevented this. A pilot program was cancelled in March, angering the Mexicans and raising concerns of protectionism. In retaliation, Mexico has brought $2.4 billion in targeted tariffs against the U.S., adding to the cost of business.

With the trucking issue still to be resolved, Beltran says that Schneider is making moves that should help shippers avoid the headaches at the border. The company is looking to create a door-to-door trucking service, using its own assets that Beltran says will make a cross border move feel like a domestic move. The company already offers a similar service between the U.S. and Canada.

Despite inefficiencies at the border, the delays that made headlines in the past few years have been largely absent this year because of the slowdown in cross border trade. This has given the aging and weak infrastructure at the borders a breather, but businesses fear that a slowdown in infrastructure development now will cause problems when the economy rebounds.

In Mexico, there is commitment to infrastructure development from both the public and private sectors, although that has slowed down as the economic crisis continues in Mexico. “There is the desire to develop, but the Mexican government is running out of revenue,” said Beltran. “Oil revenue is shrinking, tourism has fallen because of the swine flu, and U.S. demand is down.”

This is not to say the expansion is not taking place. The Mexican government has put aside $3.7 billion for highway construction and maintenance, according to Deputy Transport Minister Oscar de Buen. And in August, it was announced that the $3.8 billion port project in Punta Colonet, located on the Baja peninsula south of San Diego, which had been put on hold, will likely resume this fall. The new port will compete with other U.S. Pacific West Coast ports for Asian cargo.

Canada and the U.S. also face their own infrastructure issues, and need to increase capacity at the busiest border crossings. Over 40 percent of trade between Canada and the U.S. passes through the Windsor-Detroit Trade Corridor, which suffers from outdated and inefficient infrastructure. The Ambassador Bridge and the Detroit-Windsor tunnel connect the industrial Midwest with major cities such as Toronto and Montreal. The bridge is a priority for the Canadians, who are scheduled to begin construction sometime in the next year, with completion due in 2013. Another nearby crossing, the Blue Water Bridge in Port Huron, Michigan, received approval in May from the U.S. Federal Highway Administration to begin a $553 million expansion project.

Infrastructure, customs and security programs aside, NAFTA still represents an opportunity for the partners to capitalize on strengths and to build a trading region that offers a competitive advantage in the global marketplace.

“NAFTA is a solid benefit to businesses in all three countries and there is a good point to be made, especially in these tough economic times, for looking at a North American context for competitiveness,” said Anderson. Anderson believes that NAFTA provides North America with a leg up over other regions. “By taking advantage of agreements that are already in place and by leveraging each other’s strengths, NAFTA gives us an advantage,” said Anderson. wt



Contributing writer Andrea MacDonald writes frequently on transportation and logistics issues, especially in the U.S., Canada and Mexico.

Sidebar: NAFTA Quick Facts

•    U.S. trade with Canada and Mexico has tripled over the past 15 years, since NAFTA was implemented.

•    The three NAFTA partners conduct over $2.5 billion in trade daily.

•    Together, Canada and Mexico purchase more than a third of total U.S. exports.

•    U.S. merchandise exports to Mexico and Canada rose from $142 billion in 1992 to $422 billion (projected) in 2008.

•    U.S. industrial production increased 57 percent between 1993 and 2007.

•    Canada and Mexico account for 37 percent of the total increase in U.S. agricultural exports since 1193.

•    Canada is the top U.S. export destination for wheat, poultry, oats, eggs and potato exports.

•    Mexico is the to U.S. export destination for beef, rice, soybean meal, apples, cheese and dry edible beans.



Source: U.S. Chamber of Commerce International Policy Backgrounder, “NAFTA at 15,” February 2009.